China Solar: Who Survives China’s Polysilicon Shakeout?

With the suspension of China’s first-ever polysilicon production line (built by Dongfang Electric in Sichuan province), China's polysilicon industry is facing its biggest challenge since its founding, with 80 percent of manufacturers now closing operations.

Of over 40 poly manufacturers in China, only six or seven are still in operation due to the plunging price and industry overcapacity of the solar material. The average cost of polysilicon production in China ranges from 200,000 yuan to 300,000 yuan per ton, while the market price of the key material in solar modules has dropped to roughly 200,000 yuan per ton.

As a result, China’s imports of polysilicon doubled in February 2012 compared to the same period last year. Statistics from the General Administration of Customs showed that China imported 7,615 tons of polysilicon in February, an increase of 130 percent year-on-year. China currently imports half its polysilicon from companies overseas.

In Sichuan province, where one-fourth of these businesses are located, only two of the plants, Yongxiang Polysilicon and Renesola, remain in operation. Yongxiang has an annual production capacity of 4,000 tons; Renesola has an annual capacity of 3,500 tons.

One of the reasons Yongxiang, a private enterprise, is still in business while most of its counterparts are struggling to survive is that the firm is not limited to polysilicon production. The company has a diversified production line that consists of PVC, trichloro hydrogen silicon and cement production. Another reason for its survival is its cost-competitiveness -- the company has reduced logistics costs because it is located close to its upstream factory.

Renesola also has a distribution and structural advantage: its parent company is involved in solar cell making.

GCL-Poly Energy Holdings, China’s largest polysilicon maker, is another survivor in the polysilicon space, with the lowest cost in the industry, according to one of its chief engineers. GCL-Poly is a state-owned conglomerate that is involved in the power, real estate, and photovoltaics businesses.

Other vendors that have managed to weather the storm are listed companies with relatively good liquidity situations.

The National Development and Reform Commission (NDRC), China’s economic planning unit, recently called for a meeting with domestic polysilicon manufacturers to discuss the outlook of the industry. To support the domestic industry, the NDRC removed preferential import policies for polysilicon.

Yingli Solar currently procures 90 percent of its raw material from the U.S., Germany, and Korea, according to Cell Bian, manager of Yingli’s supply subsidiary. It will continue sourcing the raw material from abroad for the next year or two because of the fluctuating quality of domestic manufacturers, according to the supplier.

China recently issued its new 12th Five-Year Plan (2011-2015) for the solar Industry, which requires its polysilicon manufacturers to reach 50,000 tons of annual production capacity by 2012. This seems an indication that the country will only support “larger and stronger” industry leaders which will ultimately lead to the further consolidation of the polysilicon industry.

As the country tightens its monetary policy, many small and medium-sized companies and privately owned exporters have been removed from banks’ lending lists. The majority of Chinese polysilicon markers are small and private. In comparison, the state-owned enterprises (SOEs), equipped with more resources, are making moves to expand in solar.

China Enfi Engineering Corp., a state-owned EPC company which is involved in building solar projects, announced its plan to build a plant that can produce up to 20,000 tons of polysilicon per annum in the Inner Mongolia region of China. China South Industries Group, which primarily engages in Chinese military projects, has expanded its business into the PV industry. The company plans to invest 4.4 billion yuan to build a new PV industrial base in Hubei province. On the power generation side, following China National Offshore Oil Corp.’s move to expand into cell production and solar farms, Sinopec, China’s largest oil developer, has also started to diversify its portfolio -- starting its first solar project by integrating a 40-kilowatt solar power plant with one of its oil wells.

The bottom line is that China's solar industry is far from immune to the plunging prices and overcapacity in solar and is experiencing its own shakeout throughout the supply chain. Additionally, U.S. polysilicon seems to be more than competitive against China's domestically produced material.